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July 2012 Brief: Volume 19, Number 21

Constitutional Limited Government and

the Path to Economic Recovery

by John Hendrickson

Thomas Sowell, a Senior Fellow at the Hoover Institution and noted economist, recently recommended that Republicans read Andrew Mellon’s book, Taxation: The People’s Business.[1] Mellon, who served as Secretary of the Treasury during the Administrations of Warren G. Harding, Calvin Coolidge, and Herbert Hoover, outlined in his book a powerful argument for lower tax rates. Mellon believed in the importance of a balanced budget and paying off the national debt. These principles were the crucial economic pillars of the Republican Administrations of the 1920s, and it is these policies that need to be considered by policymakers today.

The economy continues to fight for recovery from the Great Recession. The future economic outlook does not appear very optimistic. Unemployment has increased to 8.2 percent and the rate goes even higher, 14.8 percent, for those who are underemployed or discouraged from looking for work.[2] In addition, “more than 40 percent of Americans” are currently dependent on some form of government assistance.[3] The economy is also facing more policy uncertainty, especially with looming tax increases, the future of the Patient Protection and Affordable Care Act, and the massive increase in regulatory activity. This future $494 billion tax increase is referred to as “taxmageddon.”[4] As Heritage Foundation scholars James Sherk and Rea Hederman explain:

Taxmageddon will result in dramatically higher taxes on capital as the top rate on dividends will almost triple from 15 percent to almost 45 percent. Capital gains taxes will be 50 percent higher. The taxes on wages will also increase, reducing the incentives to work. This is why even Keynesian models predict that taxmageddon could reduce GDP growth by a few percentage points, enough to start a new recession.[5]

Taxmageddon, unless prevented, will also result in the expiration of the Bush tax cuts of 2001 and 2003 as well as “the expiration of the payroll tax cut and some other tax extenders, and the start of the Obamacare tax increases.”[6] This across-the-board tax increase would be detrimental for an already fragile economy.

The national fiscal crisis is also causing uncertainty. Federal spending continues to rise with the government spending $3.8 trillion and running annual trillion-dollar deficits.[7] The federal government is now spending 25 percent of the gross domestic product (GDP). As Senator Tom Coburn (R-OK) explained:

In 2001, spending under President [Bill] Clinton was $1.86 trillion; spending in 2011 was a staggering $3.8 trillion. And now we are borrowing from future generations nearly $4 billion every day or $41,222 every second just to keep the government running.[8]

Uncontrolled federal spending is causing a fiscal crisis, especially with the enormous cost of entitlement programs. The cost of these unfunded liabilities is over $60 trillion.[9] Unless Congress begins to reduce spending and reform entitlements the situation poses a significant risk to our republic.

Policymakers would be wise to follow Sowell’s advice in reading Mellon’s book and studying the Republican Administrations of the 1920s. Both Harding and Coolidge followed a limited-government approach in cutting government spending and tax rates, while paying down the national debt. The 1920s began with a severe economic depression, which caused unemployment to reach over 11 percent. After slashing federal spending and lowering tax rates the economy soared in the 1920s and the depression ended quickly. The Harding and Coolidge policies created a prosperous economy with low spending and tax rates, along with paying down the national debt.

The Harding and Coolidge policies led to economic growth, but it was also their support and defense of constitutional government and free enterprise that led to the prosperity. James K. Glassman, founding Executive Director of the George W. Bush Institute, recently wrote that “government’s role is not to create jobs but help to foster an environment where the private sector can flourish.”[10] This is exactly what Harding and Coolidge did, and their policies produced economic certainty and confidence. The same can be said for President Ronald Reagan.

Amity Shlaes, an author and economic historian, recently wrote that policies of the 1920s made a positive impact on the economy.[11] As Shlaes wrote:

Voters and markets took the budget cut as a down payment and trusted that the country was headed in the right direction. As the government redeemed that faith with the tax cuts, commerce stirred. The economy grew without inflation.[12]

“Trust now matters,” wrote Shlaes, and the best way to bring back certainty is for policymakers to demonstrate a commitment to constitutional, limited government. As Shlaes correctly argued, “commitment to smaller government matters most.” It is no accident that periods of economic prosperity occurred under the Presidencies of Warren G. Harding, Calvin Coolidge, and Ronald Reagan, because all three shared not only the commitment to constitutional government, but orchestrated their policies to encourage economic growth. This is what we desperately need today. Wisconsin Governor Scott Walker’s victory over the attempted recall demonstrated that the economy is watching and reacting with enthusiasm to constitutional and free-enterprise ideas.[13]

John Hendrickson is a Research Analyst with Public Interest Institute, Mount Pleasant, Iowa. Contact him at Public.Interest.Institute@LimitedGovernment.org.

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